Global Financial Markets Update: June 2024
June 2024 was a pivotal month for global financial markets, characterised by significant volatility and key economic developments. The confluence of geopolitical tensions, economic data releases, and central bank policies played a critical role in shaping market sentiments across various regions.
United Kingdom: A Challenging Political Landscape
Rishi Sunak’s gamble on an early snap election appears to be backfiring, despite some favourable economic news. His campaign has struggled amidst scandals and challenges from the Reform Party.
Inflation slowed to 2% in May, aligning with the Bank of England’s target. However, inconsistencies remain, as certain prices continued to rise unexpectedly. The Bank’s Monetary Policy Committee (MPC) voted 7-2 to maintain interest rates at a 16-year high of 5.25%, though the close vote suggests a potential rate cut in August.
It’s important to note that while inflation figures for May and June are more acceptable, prices have not decreased. The Consumer Price Index recorded annual inflation rates of 9.1% for 2022 and 7.3% for 2023. The current average rate for a two-year fixed mortgage deal is 5.96%, lower than last year’s peak of 6.86%. However, many homeowners reaching the end of their previous fixed-rate deals will face significantly higher monthly repayments, compounded by rising costs elsewhere. The Bank of England has warned that around three million households will see mortgage repayments increase over the next two years.
GDP growth has exceeded expectations for the year so far, providing some optimism. While some individuals and businesses have yet to feel the full impact of inflationary pressures, the worst may be behind us. Economic growth has been a key theme in the election campaign, with both Labour and the Conservatives avoiding significant tax increases. However, political discourse has been somewhat overshadowed by the Euros, with more public interest in football than politics.
Europe: Turbulence Amidst Elections
European markets faced a turbulent June, with the French election causing widespread concern. The European Central Bank (ECB) expressed worries about high levels of debt in Eurozone countries like Italy, and there was speculation earlier in the month that the ECB might need to intervene if there were a mass sell-off of French bonds.
Germany, the region’s largest economy, saw its DAX index decline as industrial production slowed and consumer confidence weakened. The manufacturing sector, which represents about one-fifth of Germany’s economy, experienced a slowdown in orders amid suspicions that China is ramping up global exports to offset weak domestic demand. However, inflation fell in five key German states, indicating a possible national trend.
Eurozone inflation is expected to be 2.5% for June, slightly down from 2.6% in May. The ECB implemented its first 25 basis points rate cut in June, with markets anticipating further rate easing.
In France, President Macron’s snap election has not gone as planned. The right-wing RN party is leading with 34% after the first round of voting. Macron has called on centrist and left-wing voters to unite against the far-right. A hung parliament could result, potentially calming investor fears of an expansionary fiscal agenda in France.
United States: Political Uncertainty and Market Shifts
In the US, President Biden’s lacklustre performance in a TV debate with Donald Trump has fueled speculation about his viability as the Democrat candidate, raising concerns about a possible defeat.
The Federal Reserve maintained its hawkish stance, keeping interest rates steady for the seventh consecutive time and indicating fewer cuts than previously expected. Despite encouraging inflation data, the Fed remains cautious, aiming for further reductions before easing monetary policy. The labour market is also showing positive signs.
US stock markets continue to be dominated by the surge in Artificial Intelligence (AI), with the S&P 500 index and NASDAQ reaching all-time highs in June. However, there are signs that investors are rotating away from technology stocks towards undervalued sectors such as banking and energy. Nvidia’s stock, for instance, fell by 6.7% shortly after overtaking Microsoft as the most valuable company in the US, although it remains up by 140% for the year.
Far East: Mixed Performance Amidst Policy Divergence
Asian markets experienced mixed performance in June, influenced by divergent economic conditions and policy responses. The Bank of Japan maintained its ultra-loose monetary policy, keeping interest rates at -0.1% and continuing its yield curve control measures. This approach has supported Japanese equity markets, which performed well in June. The depreciation of the yen has also boosted tourism.
China’s economic data pointed to slowing growth and weak consumer demand, although reports are contradictory. The Chinese government announced stimulus measures, including tax cuts and increased infrastructure spending, to bolster the economy. However, concerns over the real estate sector and high debt levels weighed on investor sentiment. The modest policy intervention could expand if initial measures prove successful, and tensions with the US and EU, particularly over electric vehicle exports, could escalate in the coming months.
Emerging Markets: Facing Challenges
Emerging markets faced a challenging June, with higher interest rates in developed markets and a stronger US dollar exerting pressure on emerging economies, leading to capital outflows and currency depreciation. Emerging market central banks are likely to follow the Fed’s lead, and a delayed rate cut in the US could slow monetary policy normalisation in these regions.
In Mexico, the Morena party’s electoral victory has raised concerns about fiscal policy, reflected in increased volatility in Mexico’s exchange rate markets. In South Africa and India, ruling parties are struggling in the polls and may seek alliances to govern, potentially influencing economic policy. Brazil is undergoing a significant change in its central bank leadership at a time when rising inflation and interest rate hikes are expected.
Conclusion: The Intersection of Politics and Markets
Political uncertainty has been a dominant theme across several countries, underscoring the close relationship between politics and fiscal policy. While markets typically favour predictability and certainty, the current landscape is anything but. Inflation and central bank policies remain central themes, shaping market movements and investor sentiments. As we move into the second half of the year, these factors will continue to influence the global financial landscape, with growing pressure on central banks to cut interest rates as inflation slows and political leaders push for economic growth.
And Finally…
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